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Bank of ideas.
ECON 101

Narendra Modi says he cleansed the Indian economy and now it is primed for growth

By Kuwar Singh

Narendra Modi hasn’t wasted any time. The Indian prime minister began 2019, a year he will be seeking re-election, with a broad defence of even the most disruptive of his initiatives, especially those pertaining to India’s $2.8 trillion economy.

In a 95-minute interview in Hindi with news agency ANI, telecast on New Year’s day, Modi touched upon subjects ranging from the upcoming Indian general elections and defence matters to fractious social issues and political violence.

He devoted considerable time to economic affairs and, not surprisingly, the abrupt demonetisation of two key high-value currency notes, which then formed 86% of India’s cash supply by value, in November 2016. Besides sparking chaos, the move is estimated to have reduced the country’s economic growth by around two percentage points.

Modi, however, even denied that it was a shock move.

“In a way, the parallel economy (running on untaxed incomes) had hollowed out the country from within. Demonetisation’s biggest achievement, which in the coming days will give the country a lot of economic strength, is that the cash which had been filled in sacks has come into the banking system,” the prime minister said.

He sought to attribute the slowing down of India’s GDP to a lack of liquidity, likening it to the immediate effect of the economy’s liberalisation in 1991. “When a train changes tracks, its speed reduces. Even when…economic reforms were brought in our country, GDP growth had almost fallen below 2%—because change had come,” he said. “Now, even our growth rate has stabilised. A cleansing process was needed, we did it.”

Modi’s government has drawn almost as much flak for the badly mis-managed launch of the goods and services tax (GST). Aimed at subsuming India’s previous system of multiple levies and bringing relative fiscal uniformity across the country, this new regime was introduced before the country could even recover from demonetisation.

The GST, with its multiple tax slabs and cumbersome filing process, added to Indian businesses’ woes. The opposition, especially the Rahul Gandhi-led Congress party, has been piling pressure to reduce the number of these slabs to simplify the system—a demand the finance ministry may eventually and reluctantly give in to.

Modi, however, sought to highlight the political consensus that went into its making, adding, “Just creating a political hue and cry is not good…Decisions are taken in GST council that has all (state) governments, UTs (union territories) and centre. All have equal positions. Puducherry and GoI (government of India) are both equal. Congress governments also.”

The Indian prime minister also sought to defend his government’s case on another fractious subject: the central bank.

The state of affairs at the Reserve Bank of India (RBI) has been hotly debated in public ever since demonetisation. In particular focus have been the perceived absence of the banking regulator’s voice in the process that led to the currency ban and its frequent run-ins with the Modi dispensation over autonomy, surplus reserves, and lending rates.

Matters came to a head in early December when the RBI’s low-key governor Urjit Patel, hand-picked by the Modi government to replace the highly visible Raghuram Rajan, resigned. The move was widely seen as a mark of protest. But Modi brushed aside any such perception.

“The RBI governor himself requested (to resign) because of personal reasons. I am revealing for the first time, he was telling me about this for the past 6-7 months before his resignation. He gave it even in writing. He wrote to me personally…I acknowledge that Patel did a good job as RBI governor,” Modi said.